55 and Close to Ready - What Am I Missing?

[Travis Bickle]

Hi All -

Hoping you fine folks can look over my situation and give me your thoughts.

Personal Situation:

• 55 years old
• Current Income about $160K + 30% target bonus (bonus can vary between 10 and 40% depending on company performance)
• Assoc. Director in a Large Pharma Company
• Two daughters 17 and 18 years old - Oldest starts College this fall
• Getting very tired of the corporate grind and ready to go now. Vacations are never, ever long enough and the last half of every one is dread about having to go back to work. Sometimes I suffer stress, but nothing too serious yet and I control via meditation (but not medication yet). However, I recognize that it's not healthy.
• Have plenty of hobbies and interests outside of work. Not worried at all about not working.

Current Savings:

• $1.1M in Fidelity 401k - maintaining about 30%bonds/70%Stock Index Funds. (NOTE: I keep this more aggressively positioned as I consider the lump sum pension to be my "safe" money)
• ~$50k cash
• $25k in ROTH IRA (over the income limit to add more)
• Have stock options for 3 years worth about $60k total (~$20k/year)
• Will receive Lump Sum Pension upon retirement - current estimate of $1.3M (but this may drop at year end as they adjust each year based on interest rates - not sure what the drop will be)
• If I retire, I am eligible to withdrawal from 401k before 59 1/2 without penalty.

Current Expenses:

• We ran numbers using last year - which seemed pretty typical and came up with about $128k in expenses - $97k deemed as "essential" and $31k as discretionary. I feel pretty confident that we could lower the discretionary, and even some of the essential, by about $10-15k with no trouble
  
• Expenses include $20k/year in mortgage that will be paid off in 2025
  
• We have about $120k saved for college in 529's but are projecting total OOP costs after financial and merit aid for both to be about $300 to $400k depending on where second daughter goes. (First daughter projected to cost $160k). So - we need to fund from somewhere the additional $180k to $280k that we don't have saved in the 529's or available as cash.
  
• In retirement, I will be eligible for retiree HC benefits, which will make my health insurance about $3-$4k more than what I pay now - total of around $8-$9k/year for a family of 4. It's a good plan with low deductibles and preventive care covered 100%.

The FIRE Plan

The plan I am contemplating is to retire in 2Q18 - after I receive my bonus and options. Wife - currently a SAHM - intends to work part time as a sub teacher once both are in college, but will not make more than $15-20k/year likely and I've told her that I don't want to retire and make that mandatory income in case she doesn't like it.

For myself, I am investigating options for consulting work, but really don't want to just end up grinding at the same role I'm doing now and want something part time as I'd like to get more involved in my community.

So - I have a narrow idea of offering my services on a project-by-project basis to other companies in my industry. I have many contacts and feel comfortable that I could land some jobs, but this may not be fully guaranteed and if I hate being a "supplier" I will not want to do it any more (I have been a customer my whole career).

Plan would be to roll lump sum to an IRA, and then pay living expenses and additional college costs from 401k until age 59 1/2 (my plan does allow for withdrawals w/o penalty if I retire early). After 59 1/2 I can also start to wdwl from the IRA.

My plan would be to get everything into diversified Vanguard index and bond fund accounts with low expenses and self-manage to target stock/bond ratios.

I have run all the calculators - FIREcalc, i-ORP, and Fidelity's retirement readiness tool. All of them put available spending at somewhere between $110k to $140k/year assuming zero post-retirement working income aside from selling the stock options when they come up and social security.

I have built my own spreadsheet, in which I have built in 1.5% increase in spending each year and can adjust interest earned on my balances, and it shows that at a starting spending level of $132k I would need to earn about 5.2%/year to have my money last to age 95. I think that feels OK as I recognize that after 70 my spending will probably start dropping as we get less active.

The things I worry about are the large sums I'll have to withdraw to cover college in the early years of my retirement, and while I built that into all models it does scare me especially if there is a market downswing at the same time.

Also, the couple of financial guys I've talked to always raise the specter of huge healthcare costs in my later years and how I need to have more than I think.

Lastly, I am worried about what the drop in the lump sum pension for next year will be based on the recent interest rate increase. It may force my hand to decide whether I need to retire at year end this year, which would impact my bonus possibly.

[Rianne]

"So - I have a narrow idea of offering my services on a project-by-project basis to other companies in my industry. I have many contacts and feel comfortable that I could land some jobs, but this may not be fully guaranteed and if I hate being a "supplier" I will not want to do it any more (I have been a customer my whole career)."

I think that's the most detailed plan I've seen on this forum, but I've not been on that long.

We started a consulting LLC from home. I'm sure your resume is sufficient to pick up great consulting gigs. My DH makes $400/hour for over the phone consults. He's gone to Switzerland and traveled some, but only if he wants to. He can turn down any job. He makes his own hours and has connected with the university as he has a Phd in Food Science. Companies call often. He was in the food industry for @ 30 years in corporate so he has the business side and education side. The LLC saves us on taxes as we write off everything we can. And we can go swimming, walk the dogs, go to movies and enjoy life. He was in the 70 hour work week grind too long. I also worked and managed our finances as I have an MBA and linked up with Vanguard in 1995. Just a thought!

The spending portion seems high. You also have a mortgage. The health insurance in a huge question right now for us. You are fortunate to have a good health care plan. We're 60 yrs. old, no debt and are starting with 1.9 M 40% stocks, 40% bonds, 20% cash. Our RR is 5.6%, but that is always up in the air.

[euro]

welcome to the board, Travis!
I think what you are proposing is possible, although a withdrawal rate of 5% is quite aggressive. SS will help out in 7-10 years but you may need to find other ways to finance the college expenses not already accounted for (loans, workstudy, etc). Retiree health insurance is a huge positive and if you are with a big
Pharma, chances are they'll be around for a while

[MBAustin]

Welcome Travis! If you haven't found them already, we have a helpful list of things to think about before you make the leap:

Some Important Questions to Answer

I think you've done a very comprehensive analysis and understand the risks in your plan and the adjustments you'd make to address them if needed.

Have you looked at how your future drastically reduced income would affect the FAFSA (especially for your younger daughter)? She might qualify for decent financial aid which would help out.

[TrophyWife]

Ar you set on paying for all your childrens' college costs? Have you figured in wedding costs?

[supernova72]

Just curious on the pension option you have in regards to taking the lump sum vs lifetime annuity. I went the annuity route vs lump sum since it was discounted quite a bit for me.

My monthly pension covers about 80% of my expenses. For me my former Megacorp is very stable and actually the best performing stock in the DOW this year so I felt OK about leaving it there.

[FlaGator]

If I read it right, you've got ~2.5 mill to work with, with college costs the wild card. Haven't run the numbers (that's your job), but my bar-napkin analysis says you'll find a way to make it work with the flex in your budget. Projected college costs raise my pulse, however.

To reduce the uncertainty, suggest considering capping DD2's college costs at what you end up spending for DD1, inflation-adjusted. That should bring you into the lower end of the range. Could always ratchet that back to state-school level, but understand the fairness issues that raises. In your back pocket, though.

Your intended commitment for schooling is far beyond what I'm willing to do for my two. I know a guy who spent $200K for his kid to get a degree in Art History. While affordable on his surgeon's pay, hard for me to see how anyone got more than emotional value from that degree at a prestigious school. Won't be Harvard-educated school teachers coming out of my house.

[rodi]

Welcome to the forum.
I'm the same age - retired 3 years ago, and have college expenses in my future. (I have a Junior and Freshman in highschool).

Because of the upcoming college I've been looking intently at FAFSA... and you might be pleasantly surprised to find you might qualify for year 3 or 4 for older daughter.... but only if you roll the pension lump into an IRA. If you take it as taxable income - it counts against you in FAFSA... But IRAs are not considered from what I've been reading. Nor is your primary home. ...But if your older daughter is looking at a private school all bets are off... it varies from school to school - but most use the CSS form - and include your IRAs and primary home as available to pay for school.

If you're confident you have slop/slack in the budget and won't mind pulling in the purse strings... then they only thing holding you back is yourself. But if you really need $128k to be happy... then I'd work one or two more years to increase the nest egg.

[ER Eddie]

You talkin' to me?

Get out before you snap, Travis!

[DrRoy]

Approx. $2.5M less $350K for college is $2.15M left. $128K/y is nearly 6% WR. Way to steep for me. I do not believe that historic returns, which support the 4% WR recommendation, are going to be sustained going forward. I think 3% max is warranted. You will either need more assets or additional income.

[pb4uski]

Back of the napkin analysis assuming $50k a year in SS for the 2 of you looks good.

Retirement assets = 1,100+50+25+60+1300 = 2535
College costs ~ 350 -120 saved = (230)
Mortgage ~ (2025-2018)*20 = (140)
SS gap costs ~ (67-56)*50 = (550)

Subtotal ~ 1615

Expenses = 128
Mortgage = (20)
Subtotal = 108
SS ~ (50)
Gap ~ 58

Ultimate WR ~ 58/1615 = 3.6% .... a tad high for retiring at 56 but it sounds like you have some wiggle room in your expenses that could be tapped if necessary... assumes retiring in 2018.

Big difference from what Dr. Roy suggests above is that $20k mortgage goes away in 2025, consideration of SS and inclusion of $120k of college savings.

[BeachOrCity]

You are being too aggressive with your wr especially since your essential expenses are relatively high as well. Sorry

[Travis Bickle]

Thanks to each and every one of you who took time to comment - much appreciated:

To answer some of the questions raised:

Quote:

Originally Posted by MBAustin Have you looked at how your future drastically reduced income would affect the FAFSA (especially for your younger daughter)? She might qualify for decent financial aid which would help out.

This has been one of the hardest unknowns to get my hands on info about. From what I can tell - yes I would get better aid once we have run through their 529 money and I was drawing income from retirement funds.

Unfortunately, the oldest daughter who starts next week is going to an out-of-state public school (W&M) that caps need-based aid for OOS students at 25% of attendance (after merit aid, loans, and work-study). So - we are assuming that she won't get more than about 10-12k towards the 55k bill once here younger sister is also in college (years 2-4).

[Note: We recognize that some will feel we are overpaying sending her to a school like that, but the fit and reputation of the school are perfect for her and once her sister is going too (years 2-4), it will be more reasonable and worth paying over the "Expected Family Contribution" of 60k, which we would pay if they went to in-state. What do you do when your daughter gets into her reach school? I probably work an extra year - that's what.]

For the younger daughter, we are certainly trying to steer her towards lower cost/higher aid options and so far she has a few she's very interested in that fit the bill.

Quote:

Originally Posted by TrophyWife Are you set on paying for all your childrens' college costs? Have you figured in wedding costs?

We are having them take the standard Federal Loan at $5500 per year. We have told them that we will fund the rest of undergrad, but do expect them to contribute some income from any summer internships that they land. We have told both we will try to help with grad school if it happens, but that is not guaranteed and will depend entirely on our finances at the time.

Wedding costs are not something I have added in yet, but is a good point as I imagine those are not cheap these days. Will probably do for that what my wife's parents did - offer to pay for half or something like that.

Quote:

Originally Posted by supernova72 Just curious on the pension option you have in regards to taking the lump sum vs lifetime annuity.

There are many different options available to me, but when I did an analysis a year or so basically the analysis said that if I can earn >3.5% on the money I was better off taking lump sum based on standard life expectancy. There was not much of a discount vs. buying an annuity. I would say ~90% of recent retirees from here have taken lump sum.

Quote:

Originally Posted by rodi If you're confident you have slop/slack in the budget and won't mind pulling in the purse strings... then they only thing holding you back is yourself.

We have discussed this - potentially using a "bumpers" kind of approach where we adjust spending down if needed to stay within a certain flight path. I think this is very smart and will certainly be something we do. As for budget slack, there are definitely things - like clothes/vacations/gas/three autos/etc. that should significantly lower over time, but my intent with this initial analysis is to see what happens if I stay level with spending + inflation.

Quote:

Originally Posted by ER Eddie You talkin' to me?

Damn straight!

Quote:

Originally Posted by DrRoy Approx. $2.5M less $350K for college is $2.15M left. $128K/y is nearly 6% WR. Way to steep for me. I do not believe that historic returns, which support the 4% WR recommendation, are going to be sustained going forward. I think 3% max is warranted. You will either need more assets or additional income.

Quote:

Originally Posted by pb4uski Ultimate WR ~ 58/1615 = 3.6% .... a tad high for retiring at 56 but it sounds like you have some wiggle room in your expenses that could be tapped if necessary... assumes retiring in 2018. Big difference from what Dr. Roy suggests above is that $20k mortgage goes away in 2025, consideration of SS and inclusion of $120k of college savings.

I'm glad to see both these opinions as it means that even though I'm not clearly there, I am pretty close.

In summarizing my follow-ups for investigation over the next several months are these:

- Continue to watch balances and reanalyze
- Look closely at 2017 expenses and compare to 2016 to see and understand variance. Look for ways to save in retirement.
- Try to get youngest daughter into a school with reasonable tuition and good reputation for meeting need.
- Become more aggressive in investigating semi-retirement options, including continuing part time with current employer, consulting, or other options. When I run my analysis adding about $40k/year in retirement income between ages 56-60 it looks much better. Between me coming down with some occasional consulting gigs and my wife potentially sub-teaching that feels pretty reasonable. If it looks not reasonable, then I stick it out a while longer.


Thanks again to all your your helpful and thoughtful responses.

[CoolRich59]

Quote:

Originally Posted by ER Eddie You talkin' to me?

I see what you did there.